Here’s Why Cloud-Based Business Software Stocks Soared in the First Half of 2018

Credits : Fool

Investors are getting used to high-growth business plans that leave profit ambitions for a later date. These cloud computing experts are prime examples of this trend.

Jul 16, 2018 at 3:35PM

What happened

Shares of many cloud-based business software specialists surged higher in the first half of 2018, according to data from S&P Global Market Intelligence. Human resources management expert Workday (NASDAQ:WDAY) rushed 19.1% higher, while data analysis veteran Tableau Software(NYSE:DATA) gained 41.3% and marketing software vendor HubSpot (NYSE:HUBS) jumped 41.7%.

So what

All three of these cloud computing experts have delivered consistently solid earnings reports so far this year. Tableau fell a hair short of Wall Street’s earnings targets in the first quarter but made up for it with fantastic revenue. Workday and HubSpot simply crushed analysts’ estimates across the board in this year’s first two reports.

Investors and analysts embraced the cloud computing experts’ total results, driving their share prices almost uniformly higher around the dates of their business reports.

The one exception to this sector-spanning trend is found in Workday’s chart, which dipped in May for no obvious reason. A fantastic first-quarter report in early June also failed to restart the stalled stock, because of a fairly small boost to Workday’s full-year guidance targets.

Now what

In fact, Workday increased its sales and earnings guidance for fiscal 2018 in that seemingly weak first-quarter report — just not by quite as much as some investors might have liked.

That being said, Mr. Market has been loving cloud computing stocks in recent years. Workday shares have gained a market-crushing 69% over the last 24 months, while Tableau’s stock prices more than doubled and HubSpot delivered a stellar 156% return. Cloud-based services can deliver performance and features on par with many business-oriented tools that used to run as a software package on your desktop, adding centralized management tools for the client and high-margin subscription pricing for software providers.

At this point, all three of the companies under our lens today are valued way up in the nosebleed section, but they earned those tickets through rampant business growth. All of them have delivered average annual sales growth of roughly 50% over the last five years, paving the way toward strong earnings and cash flows when their growth-maximizing strategies give way to margin-focused business plans.

It’s no surprise to see enterprise-oriented cloud computing stocks do well as this hyper-efficient platform type continues to make inroads in every corner of the business world. It’s also not shocking to see the gains take an occasional breather as analysts and investors alike become more adept at valuing subscription prices and long-term contracts.

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